Gerry Orbell raises the volume at Sound Oil

Gerry Orbell was skiing in Courchevel when he got the call inviting him to run a new oil and gas company. At the other end of the line, Gavin Wilson of RAB Capital (LON:RAB) set out his plans for an AIM quoted 'cash box' targeting assets in West Africa. For Orbell, who says he was simply "minding my own business as chairman of Antrim Energy", the prospect offered a new challenge and one which he concedes has proved to be a long, hard grind. Nevertheless, after five years of highs and lows, Sound Oil (LON:SOU) is about to see drilling get under way across its portfolio. The focus is on near-term gas exploration and production from its flagship projects in Italy and the prospect of high impact exploration drilling on projects in Indonesia. Sound Oil floated on AIM in June 2005 and 12 months later diverted from its original African strategy with the reverse acquisition of Mitra Energia, an unquoted gas exploration company in Indonesia. The deal gave it a 34% stake in the Bangkanai Block onshore central Kalimantan and a 20% interest in the Citarum Block onshore central Java. However, appraisal and development of the two highly prospective assets was frustrated by slow progress by their respective operators. The good news is that both projects are now in the hands of new operators. At Bangkanai, where Sound Oil slashed its holding to a carried 5% in May 2010, Salamander Energy (LON:SMDR) has taken control and is planning two exploration wells this year and development of the Kerendan gas field, which lies on the licence. At Citarum, three new exploration wells are expected in 2011 under the operatorship of TSX-listed Pan Orient Energy (TSX-V:POE). Meanwhile, Orbell is working hard on a range of prospects among a portfolio of 17 oil and gas exploration permits and applications in Italy. These were acquired as part of Sound Oil's acquisition of Consul Oil amp; Gas last December - another of Orbell's directorships. The first development here is expected in April when a rig is due to complete two key intervals in the Marciano-1ST well, which are estimated to contain 2.5 billion standard cubic feet of gas. The well lies on the company's 99%-held Fonte San Damiano concession in Basilicata, in the south of Italy, and production into the local energy grid is expected this year.Gerry, tell me about the early days of Sound Oil? I had known Gavin Wilson at RAB Capital for a while and the idea was that Sound Oil should be a West African venture but, unfortunately, anything in West Africa was much more than the money we had in the box so we started looking for other things. Ultimately we came to Indonesia and took over a small company there for shares and raised some more money. It has been a very long, slow, hard grind but we are getting to the point now where we look as if we might actually be drilling five wells there in the next year or so.It sounds like the pace of development was not fast enough for a small Eamp;P company to sustain itself. Is that right? I think that's right. People who invest in small cap companies don't expect miracles overnight but they do expect some action. When you look about, most of the small caps have got high equities and operatorship in their own licences so they hope to be able to control the pace. Very often the trouble is that they don't have enough money to sustain that 100% position. But that is the way forward if you want to get going. You have to be your own operator and you have to have most of the equity otherwise sometimes the operating partners don't operate quickly enough, they have other distractions, and sometimes, if you have a large amount of equity elsewhere in the licence, people vote against you. In our case, what we had in Indonesia were a couple of unfortunate circumstances. One operator, Ranhill, was living from hand to mouth and as a result things did not go as quickly as we would have liked. The other operator, Elnusa, was doing its best in Bangkanai but it had sprung out of a Government entity and had quite a few troubles. Now we've got Pan Orient to replace Ranhill, which is a much more efficient company. On the other side of the coin in Bangkanai we've got Salamander Energy, which is a competent company and speaks the same language as us in terms of exploration. So on both fronts all of a sudden things are moving much more in Indonesia. Coming back to the issue, we looked around last year and said: 'If we go on like this we'll all be old men and we'd have done nothing, so let's get after it'. The other directors on the Board knew that I was already a director of Consul, and had started Consul in Italy, and they asked me about it. I said: 'Of course I think it's wonderful but take your own view, I'll stand aside from this'. They did take an independent view, they said it was what they wanted to do and I agreed with them because I think it is a good company, and we eventually took it over.Were your shareholders happy with that move and its outcome? We took over Consul for cash and shares at a price of 1.2p. RAB Capital, again, were in the piece with a 90% shareholding together with some smaller shareholders owning the rest. Since then our share price has really grown so there are happy, smiling faces - it is a wonderful thing as chairman but it doesn't always happen of course. There have been some pretty miserable faces in the past, so it is swings and roundabouts - a typical small cap company really.Tell me about the Italian portfolio and the opportunity there? Italy is a place which has been producing oil and gas for the last 70 years. There must be hundreds of wells in Italy and it was the foundation location of Eni (NYSE:E), which has obviously grown into one of the world's majors. The country produces about 10% of its needs every year in terms of oil and gas but essentially it imports a huge amount and is therefore keen to see indigenous hydrocarbons. I think the Italians are conscious of being over reliant on the likes of Russia and Libya. Among the players in Italy you have got the large guys, like Eni, Montedison and Royal Dutch Shell (LON:RDSA), and then you have got virtually no-one else coming up behind. It's not like the UK where there are a large number of small guys trying to make their mark. If you could look at the Brits there, for instance, you've got Petroceltic (LON:PCI), which have got their other things in North Africa, and then you've got Northern Petroleum (LON:NOP), which have got their other things elsewhere in Europe, and you've got Ascent (LON:AST), which works elsewhere in Europe as well. So really there is no dedicated Italian company. When I became a director of Consul, when it was still a private company, my view was that we should dedicate our time and efforts to Italy using Italian staff in Rome and basically mop up those things which had been discovered in the past and had been relinquished because of various factors. Often they were too small for the likes of Eni or they were uneconomic when the price of gas was down in the dumps. Rather like the UK, which has plenty of offshore undeveloped discoveries, Italy is likewise but most of it is onshore, which is ten times cheaper to develop and also far less risky. Drilling a well in Italy onshore costs $4m or £5m as opposed to the North Sea where it can costs up to $40m or $50m. It is not that much of a risk re-drilling someone else's discovery so that is the reason the portfolio was put together the way it is. Altogether, we have got about 17 permits. The Italian authorities allow you to apply for anything at any time, anywhere with an application that is published in their official gazette. If 90 days elapses and no-one else files on the same licence then that is a 100% application in your name. In due course the Government considers it and providing you comply with the rules you go forward and the licence is granted as an assigned permit. That means they want to see you do a desktop study on the environmental impact of the licence and hydrocarbon drilling, for instance. If that is satisfactory they grant you a full permit and at that stage you can shoot seismic or acquire the seismic from other people and you effectively become the absolute owner. From that moment the clock is ticking and you have got five years to fulfil a work programme. There is no entry fee, unlike some places in the world. There is a very benign attitude towards undertaking the activities. If you suddenly find that your magic prospect turns to ashes in your mouth because of some seismic line that turns the whole thing upside down, the Government is very sympathetic to that. They don't actually drive you into drilling a well which you have committed to. They say: 'Well okay, the exploration has gone to pot, relinquish the licence and go and do something else with your money'. That is a very reasonable attitude. If you do find something then you have to apply to develop it in much the same way as you would in England. Gas is quite commonplace in the Italian area and you can put that into the national gas grid or you can turn it into electricity and sell it locally. The financial take, after all taxes, is about 56%- 57%, which is a pretty good take in world terms, especially within Euroland.Gas supply is a sensitive issue in Italy so how does that impact on the economics of your production plans? Gas is in short supply. We have previously produced and sold gas through our electricity generators from a very small field in the south of Italy during the course of the company's history. That well is now depleted and we have drilled another well to replace it but we haven't yet brought that on stream. But when we were producing gas we put it through our own generators on site and sold it to a local town and we were getting $14 per 1000 cubic feet. That is three times what they get in the United States, and twice what you get in the United Kingdom, so the high prices paid means that tiny accumulations of gas are economic. They're not particularly interesting for the likes of Shell because they are looking for hundreds of millions barrels of new reserves to replace their depleted reserves on an annual basis. But for a small company like us if you can get 2 or 3 billion cubic feet of reserves on production, it is worth $4, $5, $6, $7 million. If you add enough of those together you suddenly start looking serious. So essentially it's a very benign place. We've produced 17 licences out of nothing, we've drilled a well, we've produced gas, we're about to complete another well, so for a small company we've achieved quite a number of things in Consul. It seems to me that people stomp across the world going to very expensive places where, fair enough, you get a lot of hydrocarbons perhaps in East Africa but the time to monetisation is very long unless you sell out. Whereas in Italy I think the market place is on your doorstep. For example, we have got a fantastic exploration prospect in the north of Italy, called Badile. It is about 40km from Milan and used to be owned by British Gas but they walked away and did other things like Brazil. Our competent person, Fugro Robertson, have looked at the map made by British Gas together with our calculations of what may be in place and recoverable in terms of gas, and they reckon there could be about 150 bcf of gas potential. Now, it is going to cost $15m maybe $16m to drill it according to our calculations but if it came in it is worth $400m. We have got two like that in that particular licence, so the upside is there. The Badile exploration prospect is in the Po Valley in the north of Italy where there are fields like Villa Fortuna, which has been on production for a long time and unfortunately belongs to someone else. It's hundreds of millions of barrels recoverable, so as a province it is not to be sniffed at. Of course, that particular project is exploration whereas most of our projects are not, most of them are already discovered and you need just another one or two wells to exploit them. Where there are exploration opportunities some of them are really very surprisingly good.What are you plans in terms of drilling and how has your budget been assigned across the portfolio? In terms of money in the bank, we have got $18m, $19m at the moment. We have got to commit $5m or so to three wells in Java, which are going to be drilled, and we've got a 20% interest there. That leaves $14m or so to pay for anything else we wish to do in Italy. We have done our sums and we will be able to complete this small gas field that we have got in the south, the new well, we will also be able to drill two other wells in the next 11 to 24 months and probably a third well. So two or three more wells in Italy, three wells in Java and we're also probably going to see two wells from Salamander in Kalimantan. We are only 5% but we're carried on two exploratory wells which are world class. These wells have the potential of anywhere up to 3 trillion cubic feet of gas. With 5%, if they came in, you add quite a lot of reserves to your portfolio. Indeed, in Kalimantan, Salamander are also moving forward on developing our proven gas field over the next 18 months to two years, which has planning approval from the Government for local supply. With a carried 5%, the first time we have to worry about it is when the gas starts coming in and we have to figure out where we put the cheque. Apart from that all the other costs are paid for. Admittedly we've only got 5% but all other costs are paid for with no worry. So with our money we can probably see seven wells being drilled in the next 11 to 20 months. Some of the projects in Italy are good quality, revenue generating opportunities and some of the work in Indonesia is quite exciting exploration. But the work in Kalimantan, if it came in, it is enormous and it wouldn't actually be for the local market, we would build a pipeline and take it to the LNG plant in Eastern Kalimantan, which supplies the Far East market.Meanwhile, the prospect of overseeing exploration and production in the Italian countryside can't be bad? Well you're quite right, the environment is benign. Our gas field is in a place called Basilicata, which is south of Naples in rolling countryside. The actual well site, with the gas wellhead, is in an olive grove and it is just below a village so technically you can actually sit in a café, drinking red wine and watch production occur as the sun goes down.That sounds great. Thank you for your time Gerry. Not at all. Thank you.